Gary Gensler has some explaining to do.
That is the upshot from a slew of hearings that took place in the US Congress this week which addressed how the chair of the US Securities and Exchange Commission is pursuing an ambitious regulatory agenda for cryptocurrencies.
Gensler has set off a firestorm of criticism by crypto supporters as he pushes hard to force firms to register digital assets as securities. Lawmakers on both sides of the aisle have plenty of questions to ask Gensler.
“They are champing at the bit to have him,” Ron Hammond, director of government relations at the Blockchain Association, told DL News.
Little warning
Questions are bound to include why the SEC failed to anticipate the collapse of the FTX exchange. In hearings, lawmakers asked why the No. 2 crypto exchange worldwide, with more than 1 million customers, collapsed so quickly with little warning from financial regulators.
And as DL News reported earlier this month, there is a newly formed subcommittee focusing on crypto. This week, the Subcommittee on Digital Assets, Financial Technology and Inclusion held its first hearing to review recent crypto enforcement actions — including the SEC’s recent cases on Kraken and Paxos — and banking lockouts emerging from federal regulators.
Federal Reserve Chair Jerome Powell and Commodity Futures Trading Commission Chair Rostin Behnam also appeared before Senate and House committees.
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These hearings all raised issues that will tee up Gensler’s appearance, perhaps in front of appropriations subcommittees, in the next month or so, Hammond said.
“I would not be shocked to see Gensler in front of at least House Financial Services next month, or May at the latest,” he said.
Gensler himself published an oped in The Hill that went up just an hour before the subcommittee hearing convened, reiterating his stance that the crypto industry should comply with the laws that govern the securities industry.
House digital assets subcommittee convenes
The subcommittee’s inaugural meeting heard testimony from witnesses including BitGo CEO and co-founder Mike Belshe, Coinbase chief legal officer Paul Grewal, and academic Lee Reiners. Subcommittee members grilled the witnesses on the difficulty of registering digital securities with the SEC, the putative turf war between the SEC and the CFTC, and this week’s failure of crypto bank Silvergate.
Questions are bound to include why the SEC failed to anticipate the collapse of the FTX exchange.
The subcommittee’s members are worried the SEC and banking regulators’ actions are choking off crypto customers’ access to custody, and sending investors to seek such services offshore, Hammond said.
The commission recently published a proposal that would compel investment advisers to secure client assets, including cryptocurrency, with qualified custodians. At the same time, the banking regulators put out a series of issuances that essentially discourage banks from holding cryptoassets on their balance sheets.
“Investment advisors are asking, ‘Where do we go?’,” Hammond said. “Right now, it’s pretty limited where they can custody. Banks are several years away from having the capability to do true crypto custody. We’re going to have an effective pause in this space, because as soon as new token projects come online, it’ll be illegal to custody them.”
Powell discusses pressure on crypto banking
Fed Chair Powell testified before both the Senate Banking Committee and the House Financial Services Committee this week, as investors fret about ongoing inflation, further interest rate increases, and a potential recession.
Powell parried a few crypto-related questions. He defended banking regulators’ stance on crypto, saying that while the Fed does not want to stifle innovation, it is intent on addressing fraud and risk in the sector.
Michael Barr, the Fed’s top banking watchdog, also defended the banking regulators’ statements on crypto. In a speech on Thursday, he said crypto is still not well-understood, and banks should be careful in engaging with the sector. The comments were poignant given the failure on March 8 of Silvergate, a California bank that catered to crypto firms and in 2021 had $10 billion in deposits.
SEC vs. CFTC
Is Ether a commodity or a security?
This question has long simmered in a jurisdictional dispute between the CFTC and the SEC. Now it’s back at a boil.
In testimony before the Senate Agriculture Committee, Benham said the CFTC stands by its designation of the cryptocurrency ETH as a commodity. He said that ETH has been listed on CFTC exchanges for quite some time, and this creates a “direct jurisdictional hook” for the agency to oversee both the currency and its underlying market.
Yet Gensler gave an interview last month in which he seemed to say that all cryptocurrencies other than Bitcoin are securities. And the SEC appeared to define virtually all cryptocurrencies as securities in its complaint against Terraform Labs and its founder, Do Kwon.
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Crypto industry lobbyists and supporters on Capitol Hill are worried that the CFTC and SEC are engaged in a turf war over who gets to regulate cryptocurrencies, which will sow further regulatory confusion. Many saw Behnam’s remarks as “a firm stance against the SEC’s subtle power creep over the digital asset market,” according to a Decrypt report. The agencies deny they are fighting over crypto.
There’s more: Behnam also told lawmakers that he believes stablecoins to be commodities. The SEC’s threat of legal action against Paxos regarding the Binance USD token, on the other hand, shows that Gensler believes stablecoins to be securities.
“So we have the CFTC saying Tether and ETH and Bitcoin are commodities,” Hammond said. “And then we have the SEC saying everything besides Bitcoin is likely a security. So as much as the CFTC and SEC say they are working together, there is obviously some friction there.
“The SEC has been aggressive in using enforcement actions to designate other tokens as securities. So that’s a concerning situation.”
New York AG crashes the party
If that wasn’t enough, New York Attorney General Letitia James waded into the debate on Thursday when her office filed a lawsuit against virtual currency platform KuCoin and stated that ETH is a security.
Investors didn’t like the development: Bitcoin and Ethereum plunged more than 9% by Friday as news of the lawsuit compounded the bearish sentiment following Silvergate’s liquidation.
The attorney general said that KuCoin failed to register as a broker-dealer and falsely represented itself as an exchange. James’s office was able to buy and sell cryptocurrencies on KuCoin in New York even though the company is not registered in the state, it said in a statement.
The complaint explicitly says that not only are Terra’s Luna and TerraUSD securities, but so is ETH.
